Comerica Reports Second Quarter 2015 Net Income Of $135 Million, OR 73 Cents Per Share

DALLAS, July 17, 2015 /PRNewswire/ -- Comerica Incorporated (NYSE: CMA) today reported second quarter 2015 net income of $135 million, compared to $134 million for the first quarter 2015 and $151 million for the second quarter 2014. Earnings per diluted share were 73 cents for both the second and first quarters of 2015 and 80 cents for the second quarter 2014.

"Our second quarter results reflect the advantages of our diverse geographic footprint and industry expertise," said Ralph W. Babb, Jr., chairman and chief executive officer. "Average loans were up $2.1 billion, or 5 percent, compared to a year ago and were up $682 million, or 1 percent, relative to the first quarter, with increases in most markets and business lines. Relative to the first quarter, average deposits increased $408 million, or 1 percent, with noninterest-bearing deposits up $668 million.

"Revenue was up 2 percent, with growth in both net interest income and fee income in the second quarter. Charge-offs, nonaccruals and criticized loans remained well below normal historical levels. The provision for credit losses increased, primarily as a result of an increase in reserves for energy exposure. Noninterest expenses decreased $23 million to $436 million, primarily due to a decrease in litigation-related expense.

"Our balance sheet is well positioned to benefit as rates rise. We remain focused on the long term with a relationship banking strategy that continues to serve us well."

Second Quarter 2015 Compared to First Quarter 2015

• Average total loans increased $682 million, or 1 percent, to $48.8 billion, primarily driven by a $690 million increase in Mortgage Banker Finance, as well as increases in general Middle Market, Private Banking and National Dealer Services, partially offset by decreases of $276 million in Energy and $151 million in Corporate Banking. Average loans increased across all markets except Texas, which decreased as a result of Energy. Period-end total loans increased $669 million, to $49.7 billion.
• Average total deposits increased $408 million, or 1 percent, to $57.4 billion, primarily driven by an increase in noninterest-bearing deposits of $668 million, across all markets. Period-end total deposits increased $690 million, to $58.3 billion.
• Net interest income increased $8 million, or 2 percent, to $421 million in the second quarter 2015, compared to $413 million in the first quarter 2015, primarily due to an increase in loan volume and one additional day in the quarter.
• Net charge-offs were $18 million, or 0.15 percent of average loans, in the second quarter 2015, compared to $8 million, or 0.07 percent, in the first quarter 2015. The provision for credit losses increased to $47 million in the second quarter 2015, primarily as a result of an increase in reserves for energy exposure.
• Noninterest income increased $6 million in the second quarter 2015, primarily due to an increase in card fees, as well as small increases in several other fee categories, partially offset by a decrease in commercial lending fees.
• Noninterest expenses decreased $23 million in the second quarter 2015, primarily reflecting a $31 million decrease in litigation-related expense and a seasonal decrease in salaries and benefits expense, partially offset by an increase in outside processing fees.
• Capital remained solid at June 30, 2015, as evidenced by an estimated common equity Tier 1 capital ratio of 10.53 percent and a tangible common equity ratio of 9.92 percent.
• The quarterly dividend increased 5 percent, to $0.21 per share in the second quarter 2015, and Comerica repurchased approximately 1.0 million shares of common stock and 500,000 warrants under the equity repurchase program. These equity repurchases, together with dividends, returned $96 million to shareholders.

Second Quarter 2015 Compared to Second Quarter 2014

• Average total loans increased $2.1 billion, or 5 percent, reflecting increases in almost all lines of business.
• Average total deposits increased $4.0 billion, or 8 percent, driven by increases in noninterest-bearing deposits of $3.4 billion, or 14 percent, and money market and NOW deposits of $1.4 billion, or 6 percent, partially offset by decreases in other deposit categories. Average deposits increased in all major lines of business and markets.
• Net interest income increased $5 million, largely due to loan growth, partially offset by an $8 million decrease in accretion on the purchased loan portfolio.
• The provision for credit losses increased $36 million, primarily as a result of an increase in reserves for energy exposure.
• Excluding the impact of a change to the accounting presentation for a card program, which increased both noninterest income and noninterest expenses by $44 million in the second quarter 2015, noninterest income decreased $3 million, primarily reflecting increases in fiduciary income, service charges and card fees, which were more than offset by declines in foreign exchange income and several non-fee categories; and noninterest expenses decreased $12 million, largely reflecting a $33 million reduction in litigation-related expenses, partially offset by higher outside processing expenses related to revenue generating activities and an increase in technology-related contract labor expenses.

• Net interest income increased $8 million to $421 million in the second quarter 2015, compared to the first quarter 2015.
  • Interest on loans increased $11 million, primarily reflecting the benefit from an increase in average loan balances (+$5 million), the impact of one additional day in the second quarter (+$4 million) and an increase in yields (+$2 million), in part reflecting an increase in LIBOR rates.
  • The increase in interest on loans was partially offset by decreases totaling $3 million resulting primarily from lower yields on investment securities, a decrease in average Federal Reserve Bank deposit balances and an increase in interest expense on debt.
• The net interest margin of 2.65 percent increased 1 basis point compared to the first quarter 2015, primarily due to higher loan yields.

Noninterest Income
Noninterest income increased $6 million in the second quarter 2015, compared to $255 million for the first quarter 2015. The increase primarily reflected a $5 million increase in card fees as well as small increases in service charges on deposit accounts, fiduciary income and brokerage fees, partially offset by a $3 million decrease in commercial lending fees. The increase in card fees primarily reflected increased revenue from merchant payment processing services and interchange. The decrease in commercial lending fees was primarily due to decreases in unused commitment fees and syndication agent fees.

Noninterest Expenses
Noninterest expenses decreased $23 million in the second quarter 2015, compared to $459 million for the first quarter 2015, primarily reflecting a $31 million decrease in litigation-related expenses and a $2 million decrease in salaries and benefits expense, partially offset by an $8 million increase in outside processing fees associated with revenue-generating activities. Related to litigation expense, on July 1, 2015, the Montana Supreme Court issued a ruling favorable to Comerica on a lender liability case, which reversed a jury verdict and sent the case back for a new trial. The decrease in salaries and benefits expense primarily reflected seasonal decreases in payroll taxes and share-based compensation expense, partially offset by an increase in technology-related contract labor expense and the impact on salaries of merit increases and one additional day in the second quarter.

Credit Quality
"Overall, credit quality remained solid. Net charge-offs continued to be well below normal levels at 15 basis points, or $18 million," said Babb." Net charge-offs related to our energy exposure were nominal. The provision for credit losses increased from a very low level due to an increase in criticized loans related to energy, as well as uncertainty due to continued volatility and the sustained low oil and gas prices. The reserve to total loans ratio increased to 1.24 percent, and the reserve covered nonperforming loans 1.7 times.

"Our Energy customers are generally decreasing their loan commitments and outstandings as they take the necessary actions to adjust to lower energy prices, such as reducing their expenses, disposing of assets, and tapping the capital markets. On average, loan to values remained stable from the last redetermination.

Over the past 30 years, we have built our energy business with a strategy to withstand the ups and downs of the cycles."

• The provision for credit losses increased to $47 million in the second quarter 2015, primarily reflecting higher reserves for loans related to energy^(a) as a result of an increase in criticized loans and the impact of continued volatility and sustained low energy prices. To a lesser extent, Technology and Life Sciences as well as Corporate Banking contributed to the increase in the provision, largely as a result of charge-offs and variability. These increases were partially offset by credit quality improvements in the remainder of the portfolio.
• Net charge-offs increased $10 million to $18 million, or 0.15 percent of average loans, in the second quarter 2015, compared to $8 million, or 0.07 percent, in the first quarter 2015.
• During the second quarter 2015, $145 million of borrower relationships over $2 million were transferred to nonaccrual status, of which $100 million were loans related to energy.
• Criticized loans increased $294 million to $2.4 billion at June 30, 2015, compared to $2.1 billion at March 31, 2015, reflecting an increase of approximately $329 million in criticized loans related to energy.

Balance Sheet and Capital Management
Total assets and common shareholders' equity were $69.9 billion and $7.5 billion, respectively, at June 30, 2015, compared to $69.3 billion and $7.5 billion, respectively, at March 31, 2015.

There were approximately 178 million common shares outstanding at June 30, 2015. Share repurchases of $49 million (1.0 million shares) and warrant repurchases of $10 million (500,000 warrants) under the equity repurchase program, combined with dividends of 21 cents per share, returned 71 percent of second quarter 2015 net income to shareholders. Diluted average shares remained stable at 182 million for the second quarter 2015, as an increase in share dilution from options and warrants due to an increase in Comerica's average stock price offset the impact of equity repurchases.

The estimated common equity Tier 1 capital ratio, reflective of transition provisions and excluding accumulated other comprehensive income ("AOCI"), was 10.53 percent at June 30, 2015. Certain deductions and adjustments to regulatory capital began phasing in on January 1, 2015 and will be fully implemented on January 1, 2018. The estimated ratio under fully phased-in Basel III capital rules is not significantly different from the transitional ratio. Comerica's tangible common equity ratio was 9.92 percent at June 30, 2015, a decrease of 5 basis points from March 31, 2015.

Full-Year 2015 Outlook
Management expectations for full-year 2015 compared to full-year 2014, assuming a continuation of the current economic and low-rate environment, are as follows:

• Average full-year loan growth consistent with 2014, reflecting seasonal declines in Mortgage Banker Finance and National Dealer Services in the second half of the year, a continued decline in Energy, and a sustained focus on pricing and structure discipline.
• Net interest income relatively stable, assuming no rise in interest rates, reflecting a decrease of about $30 million in purchase accounting accretion, to about $6 million, and the impact of a continuing low rate environment on asset yields, offset by earning asset growth.
• Provision for credit losses higher, with third and fourth quarter net charge-offs each at levels similar to the second quarter. If energy prices remain low, continued negative migration is possible, which may be offset by lower exposure balances.
• Noninterest income relatively stable, excluding the impact of the change in accounting presentation for a card program. Stable noninterest income reflects growth in fee income, particularly card fees and fiduciary income, mostly offset by a decline in warrant income and regulatory impacts on letter of credit and derivative income.
• Noninterest expenses higher, excluding the impact of the change in accounting presentation for a card program, with continued focus on driving efficiencies for the long term. Expenses for the second half of 2015 are expected to be higher than the first half, reflecting three more days in the second half, the impact of merit increases, a ramp-up in the second half of technology and regulatory expenses, as well as higher pension, outside processing and occupancy expenses.
• Income tax expense to approximate 32 percent of pre-tax income.

Business Segments
Comerica's operations are strategically aligned into three major business segments: the Business Bank, the Retail Bank and Wealth Management. The Finance Division is also reported as a segment. The financial results below are based on the internal business unit structure of the Corporation and methodologies in effect at June 30, 2015 and are presented on a fully taxable equivalent (FTE) basis. The accompanying narrative addresses second quarter 2015 results compared to first quarter 2015.

The following table presents net income (loss) by business segment.

 

• Average loans increased $486 million, primarily reflecting increases in Mortgage Banker Finance, general Middle Market and National Dealer Services, partially offset by decreases in Energy and Corporate Banking.
• Average deposits increased $86 million, primarily reflecting increases in Technology and Life Sciences, general Middle Market and Corporate Banking, partially offset by a decrease in Commercial Real Estate.
• Net interest income increased $5 million, primarily due to the benefit from an increase in average loan balances and one more day in the quarter, partially offset by a lower funds transfer pricing (FTP) crediting rate.
• The provision for credit losses increased $36 million, reflecting higher reserves for loans related to energy as a result of an increase in criticized loans and the impact of continued volatility and sustained low energy prices. To a lesser extent, Technology and Life Sciences as well as Corporate Banking contributed to the increase in the provision, largely as a result of charge-offs and variability. These increases were partially offset by credit quality improvements in the remainder of the portfolio.
• Noninterest income decreased $2 million, primarily due to decreases in customer derivative income and commercial lending fees, partially offset by an increase in card fees.
• Noninterest expenses decreased $24 million, primarily driven by a reduction in litigation-related expense, partially offset by an increase in outside processing fees.

• Average loans increased $76 million, largely due to an increase in Small Business.
• Average deposits increased $343 million, primarily reflecting an increase in noninterest-bearing deposits.
• Net interest income increased $4 million, primarily due to an increase in net FTP credits, largely due to the increase in average deposits and the impact of one additional day in the quarter.
• Noninterest income increased $4 million, due to small increases in several fee categories.
• Noninterest expenses increased $7 million, primarily reflecting an increase in outside processing fees and salaries expense. Salaries expense increased primarily due to the impact of merit increases and one additional day in the quarter.

 

• Average loans increased $120 million.
• Average deposits increased $64 million, primarily reflecting an increase in noninterest-bearing deposits.
• Net interest income increased $2 million, largely driven by the increase in average loan balances and one additional day in the quarter.
• The provision for credit losses decreased $8 million, primarily reflecting credit quality improvement.
• Noninterest income increased $2 million, primarily reflecting the impact of a securities loss in the first quarter which was not repeated.
• Noninterest expenses decreased $3 million, reflecting small decreases in several categories.

Geographic Market Segments
Comerica also provides market segment results for three primary geographic markets: Michigan, California and Texas. In addition to the three primary geographic markets, Other Markets is also reported as a market segment. Other Markets includes Florida, Arizona, the International Finance division and businesses that have a significant presence outside of the three primary geographic markets. The tables below present the geographic market results based on the methodologies in effect at June 30, 2015 and are presented on a fully taxable equivalent (FTE) basis.

The following table presents net income (loss) by market segment.

 

• Average loans increased $236 million in California and $67 million in Michigan (primarily general Middle Market), and decreased $281 million in Texas (primarily Energy). The increase in California was led by Technology and Life Sciences, National Dealer Services and Private Banking.
• Average deposits increased $438 million in California and decreased $51 million and $4 million in Texas and Michigan, respectively. The increase in California was primarily due to increases in Technology and Life Sciences and general Middle Market, partially offset by a decrease in Commercial Real Estate.
• Net interest income increased $5 million and $2 million in California and Michigan, respectively, and decreased $1 million in Texas. The increase in California primarily reflected the benefit from an increase in loan balances, while the decrease in Texas was primarily the result of decreased loan balances. Net interest income in all three markets reflected the benefit from one additional day in the quarter.
• Net charge-offs decreased $5 million in Michigan, and increased $5 million in California and $2 million in Texas. The provision for credit losses decreased $5 million in Michigan and increased $7 million in California and $22 million in Texas. The decrease in Michigan primarily reflected improved credit quality throughout the portfolio. The increase in Texas was driven by higher reserves due to an increase in criticized loans related to energy and the impact of continued volatility and sustained low energy prices, while the increase in California primarily reflected higher reserves in Technology and Life Sciences.
• Noninterest income increased $5 million in Michigan, remained unchanged in California and decreased $5 million in Texas. The increase in Michigan primarily reflected small increases in several fee categories. The decrease in Texas was primarily due to decreases in commercial lending fees, customer derivative income and foreign exchange income.
• Noninterest expenses decreased $26 million in Michigan, primarily reflecting a decrease in litigation-related expense, decreased $2 million in Texas and increased $1 million in California.

Conference Call and Webcast
Comerica will host a conference call to review second quarter 2015 financial results at 8 a.m. CT Friday, July 17, 2015. Interested parties may access the conference call by calling (877) 523-5249 or (210) 591-1147 (event ID No. 61399381). The call and supplemental financial information can also be accessed via Comerica's "Investor Relations" page at www.comerica.com. A replay of the Webcast can be accessed via Comerica's "Investor Relations" page at www.comerica.com.

Comerica Incorporated is a financial services company headquartered in Dallas, Texas, and strategically aligned by three major business segments: The Business Bank, The Retail Bank and Wealth Management. Comerica focuses on relationships and helping people and businesses be successful. In addition to Texas, Comerica Bank locations can be found in Arizona, California, Florida and Michigan, with select businesses operating in several other states, as well as in Canada and Mexico.

This press release contains both financial measures based on accounting principles generally accepted in the United States (GAAP) and non-GAAP based financial measures, which are used where management believes it to be helpful in understanding Comerica's results of operations or financial position. Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as a reconciliation to the comparable GAAP financial measure, can be found in this press release. These disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

Forward-looking Statements
Any statements in this news release that are not historical facts are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Words such as "anticipates," "believes," "contemplates," "feels," "expects," "estimates," "seeks," "strives," "plans," "intends," "outlook," "forecast," "position," "target," "mission," "assume," "achievable," "potential," "strategy," "goal," "aspiration," "opportunity," "initiative," "outcome," "continue," "remain," "maintain," "on course," "trend," "objective," "looks forward," "projects," "models" and variations of such words and similar expressions, or future or conditional verbs such as "will," "would," "should," "could," "might," "can," "may" or similar expressions, as they relate to Comerica or its management, are intended to identify forward-looking statements. These forward-looking statements are predicated on the beliefs and assumptions of Comerica's management based on information known to Comerica's management as of the date of this news release and do not purport to speak as of any other date. Forward-looking statements may include descriptions of plans and objectives of Comerica's management for future or past operations, products or services, and forecasts of Comerica's revenue, earnings or other measures of economic performance, including statements of profitability, business segments and subsidiaries, estimates of credit trends and global stability. Such statements reflect the view of Comerica's management as of this date with respect to future events and are subject to risks and uncertainties. Should one or more of these risks materialize or should underlying beliefs or assumptions prove incorrect, Comerica's actual results could differ materially from those discussed. Factors that could cause or contribute to such differences are changes in general economic, political or industry conditions; changes in monetary and fiscal policies, including changes in interest rates; changes in regulation or oversight; Comerica's ability to maintain adequate sources of funding and liquidity; the effects of more stringent capital or liquidity requirements; declines or other changes in the businesses or industries of Comerica's customers, including the energy industry; operational difficulties, failure of technology infrastructure or information security incidents; reliance on other companies to provide certain key components of business infrastructure; factors impacting noninterest expenses which are beyond Comerica's control; changes in the financial markets, including fluctuations in interest rates and their impact on deposit pricing; changes in Comerica's credit rating; unfavorable developments concerning credit quality; the interdependence of financial service companies; the implementation of Comerica's strategies and business initiatives; Comerica's ability to utilize technology to efficiently and effectively develop, market and deliver new products and services; competitive product and pricing pressures among financial institutions within Comerica's markets; changes in customer behavior; any future strategic acquisitions or divestitures; management's ability to maintain and expand customer relationships; management's ability to retain key officers and employees; the impact of legal and regulatory proceedings or determinations; the effectiveness of methods of reducing risk exposures; the effects of terrorist activities and other hostilities; the effects of catastrophic events including, but not limited to, hurricanes, tornadoes, earthquakes, fires, droughts and floods; changes in accounting standards and the critical nature of Comerica's accounting policies. Comerica cautions that the foregoing list of factors is not exclusive. For discussion of factors that may cause actual results to differ from expectations, please refer to our filings with the Securities and Exchange Commission. In particular, please refer to "Item 1A. Risk Factors" beginning on page 12 of Comerica's Annual Report on Form 10-K for the year ended December 31, 2014. Forward-looking statements speak only as of the date they are made. Comerica does not undertake to update forward-looking statements to reflect facts, circumstances, assumptions or events that occur after the date the forward-looking statements are made. For any forward-looking statements made in this news release or in any documents, Comerica claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

The Tier 1 common capital ratio removes preferred stock and qualifying trust preferred securities from Tier 1 capital as defined by and calculated in conformity with Basel I risk-based capital rules in effect through December 31, 2014. Effective January 1, 2015, regulatory capital components and risk-weighted assets are defined by and calculated in conformity with Basel III risk-based capital rules. The tangible common equity ratio removes preferred stock and the effect of intangible assets from capital and the effect of intangible assets from total assets. Tangible common equity per share of common stock removes the effect of intangible assets from common shareholders equity per share of common stock. Comerica believes these measurements are meaningful measures of capital adequacy used by investors, regulators, management and others to evaluate the adequacy of common equity and to compare against other companies in the industry.

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